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Regulation

SEC adopts proposal to ease audits for smaller public companies

The U.S. Securities and Exchange Commission seal is displayed outside headquarters in Washington, D.C.

The Securities and Exchange Commission voted Thursday to excuse public companies with less than $100 million in revenue from outside audits of their systems for handling financial errors or misstatements.

In a 3-1 vote, the commission approved amendments to its accelerated filer and large accelerated filer definitions that would reduce costs for certain lower-revenue companies by "more appropriately tailoring the types of companies that are categorized as accelerated and large accelerated filers while maintaining effective investor protections," an SEC news release said.

Last year, the commission revised the smaller reporting company definition to expand the number of companies eligible to submit less extensive disclosures. There are now some companies that are categorized as both SRCs and accelerated or large accelerated filers, which means they're required to have an outside auditor attest to the effectiveness of their internal control over financial reporting.

"Investors in these lower-revenue companies will benefit from more tailored control requirements," SEC Chairman Jay Clayton said in a statement. "Many of these smaller companies — including biotech and health-care companies — will be able to redirect the savings into growing their companies by investing in research and human capital."

The proposed amendments would keep requirements from the Sarbanes-Oxley Act of 2002, such as independent audit committee requirements, CEO and chief financial officer certifications of financial reports, or the requirement that companies continue to establish, maintain and assess the effectiveness of their ICFR, the SEC noted.

Robert J. Jackson Jr., the commission's lone Democrat, voted against the proposal and said in a prepared statement that there are benefits to having outside audits in place. "While paying auditors isn't free, neither is fraud," Mr. Jackson said. "And fraud is more likely when insiders, aware that auditors will not be checking their work, are less careful about controls. That's why, when we roll back protections like these, we can expect the cost of capital to rise; investors will either (assess) the risk of fraud themselves or require higher returns to protect against that risk. There's a trade-off; and hard evidence from the market, not ideological intuition, should tell us how to strike that balance."

Mr. Jackson said the commission is moving forward with the proposal in the hope that it will lead to more companies going public, but he doesn't think that will be the case.

Commissioner Hester M. Peirce, a Republican, said in a prepared statement that she's pleased that the SEC is taking this step toward expanding the pool of companies exempt from auditor certifications. "I worry about the effect of this requirement on our public markets, in particular its effect on smaller companies deciding whether the costs of going public outweigh the benefits."

The proposal will be subject to a 60-day public comment period once it's filed with the Federal Register.